After escrow analysis, annual taxes nearly quintupled!! Feeling discouraged.

[Emery Regis]

Hi all, rookie out-of-state investor here. I've been definitely going through a learning process after purchasing my 1st rental property back in May 2022, and now have encountered another headache where I almost feel like giving up.

I've been paying about $2,217 in annual taxes, but now am expected to pay roughly $10,145. There's also an escrow shortage of $6,607. Purchase price of the property was $319,000.

Before this escrow analysis, I was on track to hit roughly $12,600 of annual cashflow, and now it's a projected -$1,800.

What did I miss? What am I missing here? Any advice?

Thank you BP community for all your insights.

[Randall Alan]

Quote from @Emery Regis:

Hi all, rookie out-of-state investor here. I've been definitely going through a learning process after purchasing my 1st rental property back in May 2022, and now have encountered another headache where I almost feel like giving up.

I've been paying about $2,217 in annual taxes, but now am expected to pay roughly $10,145. There's also an escrow shortage of $6,607. Purchase price of the property was $319,000.

Before this escrow analysis, I was on track to hit roughly $12,600 of annual cashflow, and now it's a projected -$1,800.

What did I miss? What am I missing here? Any advice?

Thank you BP community for all your insights.

@Emery Regis

It's likely you missed several things:

First - the property taxes at the time of sale are the property taxes of the previous owner.  Let's say they were paying $2,000 in property taxes.  When you closed, everyone (title, lender, etc) uses the existing property taxes of the property as the starting taxes on the property.  However, let's say that was an owner occupied house, and they originally paid $100,000 for it 15 years ago.

When the sale is completed, the taxing authority now uses the new sales price as justification for the fair market value of the property.  If you overpaid (relative to other similar properties) , they factor the fair market value down a bit.  If you underpaid for the property, they factor the fair market value upwards. My particular county takes the sales price less 15% and then does that over/under calculation.  

Depending on your locality there can be caps in place as well... in Florida there is a rule that you can't raise the taxes more than 3% a year (or something to that effect).  Then there is also homestead exemptions.  In Florida you get at $50,000 exemption if you live in the house (ie. they lower the taxable value by $50,000 for many of the taxes - but not educational taxes).  

So, from $100,000 tax basis to a 300,000 tax basis, your taxes could possibly triple what they were before.  If there were caps and exemptions applied for owner occupied, and now you are using it as an investment property all those discounts would fall off as well. 

Then - to add insult to injury, now that you have a shortage in your escrow account, you now have to make-up the funds that your lender will front for you to pay the taxes for the CURRENT tax assessment.  So if you were $6,000 short - they will raise your escrow by $500 a month - and send the tax payment to the county even if there weren't funds available in your escrow account to cover it.   But that $500 increase in escrow is just for the shortage for the CURRENT year - not for the COMING year that they need to accumulate taxes for the next assessment.  So your estimated taxes for the COMING year are now reset to the current year's taxes and that will be higher than what it was before as well.  So it is somewhat of a double whammy when this all goes down.  The good thing is that the $6,000 shortage should be a one time step-up... so after the first year of making up that shortage any future shortage would be MUCH LESS! (But every time taxes or insurance go up, they will adjust for it).  You usually have the options to pay any shortage at the time you are notified and then your monthly payment is less (but in the end it is a wash - same dollars get paid).

It's a normal thing that happens... but if you are not expecting it, it can be shocking.  After you get past this first year of making up your shortage your rental will still cash flow fine.  

Just as another fun tidbit - if you ever refinance a property - the same thing happens.  The refi acts as a sales transactions that the county will use to adjust your taxes as well.  (death and taxes... both are assured!)

Hope it helps to understand.

Randy